The triple lock may be doomed but future pensioners must be sure saving
incentives will remain, says Andrew Oxlade.

Pensions Minister Steve Webb has admitted the "triple-lock" guarantee on state pension rises may not be here to stay.

Speaking on Radio 4's Today prorgamme, he said: “We’re certainly being honest with people and saying that the triple lock is something that wasn’t in place before 2010, so it was a political decision by the Liberal Democrats… and I’m confident that we will press for that at the next election, but obviously we also have to be honest with people.”

The interview followed on from comments he made to the FT earlier this week.

How quickly state pension payments rise has long been controversial. Margaret Thatcher famously ordered in 1980 that the link with average wages be severed.

Instead, increases tracked the retail prices index (RPI). For decades, the state pension grew more slowly than it would have done under the previous earnings-linked system.

In 2010, the Coalition unveiled a policy, led by the Liberal Democrats' Mr Webb, to give pensioners a triple-lock guarantee. The pension rise would always be the higher of wages or inflation, underpinned by a minimum of 2.5pc.

RPI was replaced by the traditionally lower Consumer Prices Index (CPI) but the guarantee compensated for this.

The triple lock's merits were shown this year. April's annual state pension rise was 2.5pc because inflation last September (the crucial month of measurement) was just 2.3pc and wages registered an increase of just 1.7pc.

But Mr Webb has indicated that it the triple lock probably won't last, and certainly cannot be guaranteed after the next election, due by 2015. The Pensions Bill, debated in the Commons yesterday, provides for the state pension to be increased in line with earnings. "The triple lock guarantee has no statutory underpin, it is based purely on the coalition agreement," said Tom McPhail, head of pensions research at Hargreaves Lansdown. "It can be withdrawn at any time."

Labour, which says it supports the triple lock, is not 100pc committed to keeping it.

Politicians of all colours can see the costs mounting and with the economy still faltering, wonder how they can meet the bill.

The costs short-term are considerable, longer-term they are colossal.

The state spends £110billion on pensioner benefits, including the state pension. This is expected to be inflated by £45bn over the next 15 years because of the triple lock.

By 2060, spending on state pensions as proportion of GDP will have risen to 8.5pc, up from a projected 6.6pc in 2016. Changes to the system to introduce a single-tier state pension, which will probably be around £150 a week (currently £110 for a basic pension) when it starts in 2016, will sweep away much of the complexity and help reduce the cost to around 8.1pc of GDP by 2060.

But continuing the triple lock would require yet more borrowing or huge tax rises.

We're in this situation because successive governments have not positioned their finances sensibly, ignoring the rule of every well-run household: spend less than you earn. To compound the problem future projections of the money Britain will earn are all still based on the myth that economic growth, and tax revenues, will return to normal "next year", a dangerous belief most forecasters have been repeating for several years and continue to stick with. The reality is that Britain's wealth has reached maturity, but it's approach to spending hasn't.

With the "honesty" that Steve Webb has found, we are all more clearly faced with the stark reality that state pensions - which anyone under 35 won't receive until age 68 under current rules or probably later once more honesty is found - will be woefully inadequate by the time most of us retire.

Unfortunately, poverty for pensioners today and in future has been worsened by inept government policy and constant meddling. People have been put off from making their own pension saving. Most prominent in the memory of savers is Gordon Brown's pensions tax raid in 1997, but the structure of the welfare state and pension credits meant for many, saving in a pension was counter-productive.

To his credit, Mr Webb's plans will sweep away much of the complexity but once again we're left in the situation where the retirement income people can expect remains unknown. It is disappointing and dispiriting that the Coalition has gone through the charade of a offering such a short-term policy.

It leaves tomorrow's pensioners unsure of the income they can expect in retirement and how much they need to save themselves.

What is needed is clarity on the future of pension income and a system of private pension saving that Britons can trust.

A start would be a pledge from parties to protect the dwindling incentives to save. Most importantly, a promise that the 25pc cash-free lump sum that everyone can take from a pension pot at age 55, and the tax breaks given on contributions will not be further eroded.

Urgent action is also required in reducing the charges applied on pensions.

The honest approach is accepting that encouraging individuals to save is the best hope for tackling the pensions crisis rather than making unaffordable and ever-changing state-backed promises.